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    Is Tax on Certain Foreign Procurements applicable to Foreign Military Sales if Foreign Person does not meet any of the exceptions?


    The question posed pertains to FAR 52.229-12 (Tax on Certain Foreign Procurements) and the pertinent section of US law that establishes this requirement, Title 02, USC, 5000C.

    • US law only requires that "Foreign Persons" pay this excise tax, so any U.S. corporation (even if it is foreign owned or controlled) is not required to pay this tax.  
    • US law also states that "Foreign Persons" (which includes foreign companies) from countries that have established an "international procurement agreement" with the U.S. Government/DoD may also be exempted from paying this, tax subject to the terms of such agreements with other nations.
    • Foreign contractors have the ability to consult the OUSD/A&S/DPC website to obtain a listing/copies of DoD Reciprocal Defense Procurement Agreements with allied and friendly nations.  It is possible that other USG - foreign country "international procurement agreements" exist at the government-to-goverment (rather than the DoD - Ministry of Defense) level.

    Based on this analysis, any foreign contractor being paid directly under a DoD contract awarded for the purpose of implementing an FMS Letter of Offer and Acceptance (LOA) that is not exempted from this tax -- based on the legal and regulatory provisions cited in the bullets above -- would be subject to this tax.

    That said, it is clear from the FAR provision that the foreign contractor is solely and wholly responsible for determining whether they are obligated to pay this tax since, if they are not exempt, they pay this tax directly to the IRS (rather than through the contract). 

    Accordingly, we recommend that DoD personnel involved in this situation make it clear that DoD has no involvement or responsibility whatsover regarding foreign contractor obligations and compliance with this tax requirement.  The foreign company should base their decision on whether or not they are obligated to pay this tax based on the advice provided by their legal counsel and tax advisors.

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